Analysts warn of coming gift card malaise

As a category, gift cards have tradition­ally kept giving — their sales have posted regular gains over the past few holiday seasons. Consumer appetites for plastic didn't diminish over this period, and the selection of companies offering gift cards grew wider to include not only clothing and electronics retailers, but discount chains, gas stations, restaurants and even credit card companies.

This year, however, industry experts predict the excitement that has surrounded the category may drop a notch or two — and not just because of the economy.

The gift card category “has been accepted and is now a mature category,” says Michael Unger, principal at Arch­stone Consulting. “Because of this matu­ration and the state of the economy, we expect to see a slight dip in gift card sales this holiday season.”

This doesn't mean that the cards are not still the top gift choice for many. They're just not the new kid on the block any­more, Unger explains.

In its 2008 Holiday Gift Card Survey, Archstone Consulting predicted that gift card sales will dip 5%, to about $25 billion. Only 24% of consumers plan to increase their spending on gift cards in 2008, according to the survey.

And, if retailers are overly fearful in anticipation of slow holiday sales and begin discounting merchandise more aggressively than usual, gift card sales are likely to trend downward even more.

This reasoning goes out the door when consumers can choose between purchas­ing a full-price gift card or a sweater for a family member that is marked down 50%, he adds.

The credit crunch has not yet had a major impact on gift card sales, but in one high-profile example of where changes might be felt, Sharper Image said it would no longer honor gift cards after it declared bank­ruptcy earlier this year. Last month, a judge approved the request of a Sharper Image gift card holder for class certifica­tion, allowing people holding an estimated $19 million worth of unused gift cards for the defunct retailer to have their claims recognized as a class action suit.

Many of the consumers surveyed by Archstone weren't aware of the Sharper Image issue. Among those who had heard about it, 50% indicated they were mildly concerned about it, Unger notes.

The economy may also affect the kind of gift cards consumers buy.

“While consumers still claim purchas­ing so-called ‘treats' with gift cards, there may be a shift to people buying more necessary items” because of inflation and other economic factors, says Lauren Coady, manager of consumer research at National Research Network.

In a recent survey of gift card usage from NRN and The Hartman Group, one-third of respondents reported that they had used gift cards to purchase a necessary item. For this reason, restaurant and gas gift cards may actually grow in popularity, Coady points out.

Because of the uncertainty in the mar­ketplace, “it's important for retailers to step up marketing [of gift cards] this holi­day season in order to keep up market share,” she adds. For example, she said, “consumers would like to receive remind­ers about when cards expire.”

Among those respondents to NRN's survey who said they don't like giving gift cards, 47% hesitated due to expiration dates. Reportedly, 27% of consumers who received gift cards are unable to use them due to expiration dates. To combat this, a reminder system could be implemented.

This could benefit retailers as well, since gift cards don't show up as a sale in financial books until they are redeemed. Neiman Marcus recently reported that while sales were down, it had recorded $6 million in income related to old gift cards during its fiscal fourth quarter.

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